USD/JPY: focus remains on yields and risks in politics - Scotiabank

In respect to USD/JPY, analysts at Scotiabank explained that the upcoming release of industrial production figures presents an added domestic risk however the overarching narrative for JPY remains centered around relative central bank policy and interest rate differentials with a 2Y U.S.-Japan spread pushing toward 130bpts at levels last seen in 2008.

Key Quotes:

"Measures of sentiment are suggestive of near-term demand for protection against JPY strength (USD/JPY downside), likely reflecting concerns surrounding this weekend’s Italian referendum. Reminder that JPY is vulnerable to knee-jerk haven-driven gains in periods of risk aversion.

One week implied JPY vol has pushed above 16% and the aggressive move in the one week risk reversal has pushed it below most of its longer tenors. Near-term risk for JPY is elevated."